Balloon Mortgage.... Never Heard of it, Huh?

 The Pros & Cons for investors using balloon mortgage financing

Balloon mortgages can be a good financing scheme for investors who want a low fixed interested on their loans. Typically these types of mortgages have a shorter term than you could usually get with a conventional mortgage. The term usually lasts for 5 to 7 years. The biggest drawback for an investor is that when the shortened term ends, you are responsible for paying the remaining balance in full. So, you are banking on the notion that you will have the capital needed to pay off the balance.   A balloon payment mortgage can be  ideal for investor who is expecting to receive a big sum of money: equity, cash flow, etc.  by the end of the term.

Here are the main benefits and risks associated with balloon mortgages:

Pros of Balloon Mortgages

1. Affordable Initial Cash Outlay

With a balloon mortgage you can expect to pay a lower down payment than with an conventional loan.  This can allow you to leverage the capital that you have to acquire more properties and create more cash flow for your investment portfolio.

2. Lower Interest Rate 

A low fixed interest rate is always a good thing when it comes to real estate investments. Many experienced investors call this concept, " cheap debt."  Given that the loan will mature with 5-7 years, many lenders would be willing agree.

3. Remaining Balances can Be Refinanced

In the event that you don't have the capital needed to pay off the balance when the mortgage matures, you can apply for refinancing the remaining balance. The only problem is that the interest rate that the lender will charge you will be based off of the prevailing interest rate of the marketplace.   This can potentially open you up to a higher interest rate.

Cons of Balloon Mortgages

1. Large Payment Due upon Maturity

The main disadvantage of a balloon loan is the large lump sum payment due upon maturity. If you are unable to pay off the balance at the end of the term, you do risk the possibility of the property being foreclosed on. If you are able to refinance the mortgage, you will possibly open your self up to a higher interest rate.

2. Higher Risk of Foreclosure

There is always that chance of foreclosure in any type of home loan, but the risk of losing your home can be higher with a balloon mortgage. Apart from the big lump sum amount that you need to pay on maturity date, your failure to qualify for loan refinancing can increase the risk of foreclosure and make things more difficult. During the 2008 mortgage crisis, a significant number of people with balloon mortgages faced foreclosures because they were unable to sell their homes on time and pay for the remaining balances of their loans or they simply were unable to get refinancing.
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